Internal approaches used for the calculation of own funds requirements for market and credit risk are subject to an annual assessment by competent authorities. The EBA assists competent authorities in their assessment by providing a report including benchmarks which help to identify any material differences in RWA outcomes. The legal framework for the above is provided by Directive 2013/36/EU (CRD) and in particular Article 78 thereof as well as by the following technical standards provided by the EBA: a) Regulatory technical standards (RTS) laying down standards for competent authorities as regards the assessment of the internal approaches adopted by institutions and the procedures for sharing of those assessments between competent authorities; b) Implementing technical standards (ITS) specifying the benchmarking portfolios and reporting instructions for institutions to be applied in the annual benchmarking exercises.

The European Banking Authority (EBA) published today two reports on the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements. The reports cover credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. The results confirm previous findings, with the majority of risk-weights (RWs) variability explained by fundamentals. These benchmarking exercises, conducted by the EBA on an annual basis are a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restoring trust in internal models.

Credit Risk exercise

The credit risk report examines the different drivers leading to the observed dispersion across banks' models. Most of the results are broadly in line with previous exercises, with 50% of the difference in variability explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. The remaining could be attributed to differences in collateralisation and other institution-specific factors, such as risk strategy and management practices, idiosyncratic portfolio features, modelling assumptions, client structure, as well as supervisory practices. This confirms previous findings that RWA variability can be explained, to a large extent, by looking at some measurable features of institutions' exposures.

For LDPs, the risk weight assessments of institutions on a set of common counterparties have been compared. When substituting the risk weight with that of the median institution, the resulting deviations would generally be below 10%. Furthermore, the variability in estimates has been stable in comparison with the 2017 benchmarking exercise.

For HDPs, the estimated values of probabilities of default (PD) and loss given defaults (LGD) have been compared with observed values, i.e. default rates and loss rates. The report presents evidence that the majority of institutions have conservative estimates, in particular when compared with the observed values for the latest year. In comparison with the 2016 exercise, both default and loss rates have decreased more than PD and LGD estimates in recent years, which is likely to reflect a general improvement in economic conditions.

The competent authorities performed an assessment of the internal models, which have been identified as outliers in this benchmarking exercise. In comparison with previous exercises, their monitoring activities are increasingly noticing issues identified by the EBA benchmarking exercise. The same conclusion holds for institutions' internal validations. This is reassuring and indicates that the increased regulatory and supervisory attention paid to internal models is contributing to the consistency of the RWA of internal models.

Market Risk exercise

Compared to the previous exercise, the 2018 analysis shows a reduction in the dispersion in the initial market valuation (IMV) and risk measures. This improvement was expected and is mainly due to the simplification in the market risk benchmark portfolios. Some variability in the results persists, which mainly stems from different interpretations and heterogeneous market practices adopted by the firms. Some of these issues have been addressed, and the quality of the data has improved.

From a risk factor perspective, interest rate portfolios exhibit a lower level of dispersion than the other asset classes, which is most likely due to the use of more consistent practices and assumptions that are more homogeneous across the banks when modelling interest rate risk. This finding confirms the conclusions drawn in last year's analysis.

In line with the previous exercises, a significant dispersion for all the risk measures is observed. More complex measures such as incremental risk charge (IRC) and all price risk (APR) show a higher level of dispersion.

This report has provided input for competent authorities on areas that may require their further investigation, such as IMV variability for some credit spread products. Supervisors should pay attention to the materiality of risk factors not in VaR and, in particular, not encompassed in the IRC models.

Note to the editors

These annual benchmarking exercises contribute to the work the EBA is conducting for improving the regulatory framework, increase convergence of supervisory practices and, thus, restoring confidence in internal models. For credit risk internal models, the EBA has followed its roadmap for the implementation of the regulatory review of internal models.

The European Banking Authority (EBA) launched today a consultation to amend the Commission's Implementing Regulation on benchmarking of internal models to adjust the benchmarking portfolios and reporting requirements in view of the benchmarking exercise it will carry out in 2020. The proposed changes aim at simplifying the portfolio's structure for the credit risk part of the exercise, and getting more insights into the model used for pricing for the market risk part of the exercise. The consultation will run until 31st January 2019.

Based on the feedback received from the recent interactions with institutions, the EBA's proposals included in this Consultation Paper aim at facilitating the reporting for the credit risk portfolios. The simplification of the structure of the data collection as well as the reduction of the number of portfolios is expected to enhance the data quality. Furthermore, the objective is to keep the structure of the portfolios stable for the 2021 exercise.

The main changes in the definitions of the credit risk portfolios are (1) a reduction in the number of portfolios to be submitted, (2) a simplification and alignment in the structure of the portfolios to be submitted and (3) a number of technical refinements, such as the inclusion of covered bonds, an update of the Indexed loan-to-value range (ILTV), Statistical Classification of Economic Activities of the EU (NACE) and Credit Risk Mitigation (CRM) splits, and the introduction of a sub sample of large corporates with revenue below or above 500m€.

The EBA is also proposing minor consistency updates as well as a data collection of the sensitivities aiming at further improving the data quality.

Consultation process

Responses to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 31st January 2019.

A public hearing will take place at the EBA premises on 25 January 2019 from 14:00 to 15:30 UK time.

Legal basis and background

Article 78 of the Capital Requirements Directive (CRD) requires competent authorities to conduct an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. To assist competent authorities in this assessment, the EBA calculates and distributes benchmark values against which individual institutions' risk parameters can be compared. These benchmark values are based on data submitted by institutions as laid out in the Capital Requirements Regulation (CRR), which specifies the benchmarking portfolios, templates and definitions to be used as part of the annual benchmarking exercises.

EBA publishes updated ITS package for 2019 benchmarking exercise

The European Banking Authority (EBA) published today an update to its Implementing Technical Standards (ITS) on benchmarking of internal approaches. The ITS include all benchmarking portfolios that will be used for the 2019 benchmarking exercise.

Today's update includes changes and clarifications that the EBA introduced based on the consultation paper that was published on 18 December 2017. For the market risk benchmarking, the portfolios have been significantly updated. After three years of exercises (2016-2018), a new set of portfolios have been introduced, which are significantly simpler in their composition and consist of plain vanilla instruments. This will allow a broader coverage of the instruments in the 2019 exercise.

Minor changes have been introduced for the credit risk portfolios, but adjustments have been made to the data requested from institutions. These changes most notably include: 1) a distinction between on- and off-balance sheet exposures, 2) adjustments to the metrics for benchmarking portfolios, 3) a new split by collateral types and 4) separation of specialised lending exposures. In addition, it should be noted that the transitional provision that allowed institutions not to report a benchmarking metric based on the Standardised Approach (SA) has expired.

Regarding the data submission for the current 2018 benchmarking exercise, resubmissions are welcomed, where necessary. However, banks shall not be obliged to resubmit the same data due to the difference of submission dates set out in the consolidated version of the 2018 ITS published by EBA on 12 October 2017 and the version of the ITS published on 18 May 2018 in the Official Journal of the EU (OJ).

The European Banking Authority (EBA) published today an update to its Implementing Technical Standards (ITS) on benchmarking of internal approaches, which define the benchmarking portfolios for the 2018 benchmarking exercise.

Today's update includes minor changes and clarifications that the EBA agreed with the Commission in advance of the Commission's adoption of these standards. These updates do not entail any change to the policy or legal content of the technical standards but eliminate inconsistencies in wording and facilitate harmonised data submissions in April 2018.

The European Banking Authority (EBA) rectified today Annex 1 of its Implementing Technical Standards (ITS) on benchmarking of internal approaches, which had been amended on 4 May 2017 to define the benchmarking portfolios for the 2018 benchmarking exercise.

Today's corrections eliminate some duplicate portfolio identifiers (IDs) in Annex 1 of the ITS, which might lead to technical and practical problems for data validation and when mapping portfolio IDs to the relevant internal models applied by banks. These corrections do not entail any change to the policy or legal content of the technical standards but facilitate effective data validation. The revised portfolio IDs should be used for data submissions in April 2018.

The European Banking Authority (EBA) published today an amended version of its Implementing Technical Standards (ITS) on benchmarking of internal approaches. These amendments aim at ensuring a better quality of the submitted data and, ultimately will assist the EBA and competent authorities in their 2018 assessment of internal approaches for credit and market risk. The EBA plans to annually update the ITS to ensure future benchmarking exercises are relevant and successful.

The draft ITS reflect the Single Rulebook at the reporting level and, therefore, need to be updated whenever the Single Rulebook is updated. Answers to questions about the Single Rulebook raised using the Q&A mechanism have contributed to more precise reporting instructions and definitions.

In addition to the Q&A-driven changes, updates to the benchmarking portfolios were necessary to facilitate the 2018 benchmarking exercise for both credit and market risk, so that they remain relevant for supervisors.

These amendments are expected to be applicable to the submission of initial market valuation data in November 2017 and of other market and credit risk data in April 2018.

Legal basis

Article 78 of Directive 2013/36/EU (the CRD) requires competent authorities to make an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. The same Article requires the EBA to produce a report to assist competent authorities in this assessment. The EBA's report is based on data submitted by institutions as specified in the draft ITS which specify the benchmarking portfolios and reporting requirements that should be applied in the annual benchmarking exercises by institutions using internal approaches for market and credit risk.

The European Banking Authority (EBA) issued today an Opinion to the European Commission expressing agreement with its proposed amendments to the EBA Implementing Technical Standards (ITS) on benchmarking of internal approaches. These amendments, which were agreed with the EBA building on the experience of the 2014-15 benchmarking exercise, aim at ensuring a better quality of the submitted data and, ultimately, at strengthening the benchmarking analysis performed by the EBA and Competent Authorities. The EBA plans to annually update the ITS and to maintain them on a regular basis to ensure the success and quality of future benchmarking exercises.

Next steps for 2016 and future benchmarking exercise

The amended ITS on benchmarking of internal approaches will allow the EBA to run its 2016 exercise based on the data requirements specified in the amended standards. In particular, the 2016 exercise will cover credit risk for the so-called high-default portfolios (small and medium enterprises and retail) and market risk portfolios as well as some information about the models used to produce the results.

All EU institutions using internal approaches to calculate capital requirements will be subject to an assessment of their internal approaches and are required to submit to their Competent Authorities the data on those portfolios by close of business on 30 June 2016.

Changes to the ITS will be applied annually since some features of the instruments or counterparties included in the benchmarking portfolios require regular updating as they may become obsolete or cease to exist.

The EBA is currently taking into consideration the changes to the portfolios relevant for the 2017 exercise. These too will be transmitted to the European Commission and published after the adoption by the EBA Board of Supervisors.

Background

The ITS on benchmarking of internal approaches were published and submitted to the European Commission in March 2015. On 20 April 2016 the latter informed the EBA that it intended to adopt the ITS with amendments proposed to the EBA building on the experience of the 2014-15 benchmarking exercise.

The European Banking Authority (EBA) published a set of papers for benchmarking the internal approaches that EU institutions use to calculate own-funds requirements for credit and market risk exposures. The EBA final draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) specify in detail the framework for EU institutions and competent authorities to carry out the annual supervisory benchmarking foreseen by the Capital Requirements Directive (CRD IV). The EBA also issued its response to a call for advice by the European Commission's on the benchmarking process. This work is part of the EBA's efforts to address possible inconsistencies in the calculation of risk weighted assets (RWAs) across the EU Single Market and to ultimately restore confidence in EU banks' capital and internal models.

The EBA standards define the benchmarking portfolios as well as the methodology that competent authorities across the EU shall use in order to assess the quality of institutions' internal approaches for capital calculation purposes.

In particular, the draft implementing technical standards (ITS) specify the benchmarking portfolios as well as the templates, definitions and IT solutions that should be applied in the benchmarking exercise for market and credit risk. The draft regulatory technical standards (RTS) specify the procedures for sharing the assessments between the competent authorities and with the EBA as well as the standards that will be used by competent authorities to assess the internal approaches banks apply to calculate their capital requirements for market and credit risk.

The regular benchmarking exercises will allow an assessment of differences in RWAs across EU institutions and the identification of potential underestimation of capital requirements.

These standards build on the work carried out by the EBA on the comparability of capital requirements for credit and market risks in the past years and aim at minimising the burden for banks and competent authorities.

Finally, the EBA is also publishing its response to a call for advice by the European Commission's on the benchmarking process. In its response to the Commission, the EBA has provided a meaningful although preliminary assessment of different issues related to the functioning of the benchmarking process, such as the usefulness of these kind of exercises, the appropriateness of its scope and frequency, the suitability of the current legal setting, the need to introduce proportionality, or the usefulness of extending the scope of the exercise to include the advanced measurement approaches (AMA) for operational risk.

Legal basis and next steps

These final draft RTS and ITS have been developed in accordance with Article 78 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 (Capital Requirements Directive or CRD IV) on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

The first benchmarking exercise conducted under the ITS and RTS framework will be based on data referred to Q4 2015 observations. Institutions shall report the information by 11 April 2016.